The value of aircraft leasing business and rental contract design

Abstract

Air transportation plays an increasing crucial role in daily life in the present day. At present, more than 33% of the world's aviation fleet is rented from leasing companies and the proportion is likely to keep growing. We study a problem of rental rate pricing and rental contract designing in aircraft leasing industry. In a framework of Stackelberg game, the system is composed of an airline and a lessor. The lessor announces daily rental rates and provides a long-term contract on a horizon with multiple periods. Identical rental rate is offered in the contract, if the airline promises to rent a pre-determined number over the horizon. We study two scenarios: 1) decisions without contract, 2) contract with fixed duration. We illustrate the value of leasing without contract. In addition, we demonstrate the lower bound and the upper bound for the value of the long-term contract. It is Pareto optimal in this range and given revenue sharing ratio, the equilibrium exists. Eventually, both the lessor and the airline get benefit from an appropriate long-term contract.